In this podcast I talk about the government's funding bill that rips off workers and gives new, free money to Wall Street banks to play with. And I talk about Russia and the crazy policies that Putin and the central bank are employing, which are only hurting the economy and further enabling Western sanctions.
Podcast for Dec 12.
16 comments:
Could be like this:
The Russian banks (ie not Central Bank) are probably facing liquidity problems because they are financing oil based assets in USDs which are falling in price with the price of oil in USDs....
Mosler: "deflation is highly problematic for banks.."
So they have USD liquidity shortages so what do they HAVE to do?
They HAVE TO go to their CB for a USD loan or balance exchange... as the RCB is their lender of last resort...
So, the people at the Russian Central Bank who have USD reserves at the US Fed available on account for their member banks to access in a time of crisis, arrange an exchange of currency balances at the Fed between their CB account and the russian member bank, ... BUT at what price?
What PRICE?
The CB people, being good public servants of the Russian govt, they "want to get a good deal for the Russian taxpayers" so they ask for MORE roubles for their USD balances, ie they INCREASE their USD offered price in roubles .... which SETS THE PRICE for the rouble LOWER than otherwise against the USD...
iow if the exchange rate is 50 rouble per 1 USD that morning, and the banks are in trouble and they go to the Russian CB for USDs... they say to the CB, "look, we need USDs bad..." then the CB people say, "well, the rate was 50 this morning, but, we want to get a good deal for the Russian taxpayers, so, make it 51.50 and we got a deal!"...
The bank TAKES IT... as they are desperate... and the Russian CB instructs the Fed to credit the russian member bank account for 1 USD while they (russian CB) debit the member bank RBS for -51.5 rouble...
What would make us think that these people who work at the Russian central bank wouldnt conduct themselves like the morons who work at the US central bank?
AND: "ALL PRICES are a function of what the govt pays for things...."
WHAT PRICE in roubles does the Russian CB demand from its members in exchange for its USD balances at the Fed? THIS is the exchange rate...
and the people there "want to get a good deal" for their USDs "for the Russian taxpayers..."
No different than what our morons do over here...
Lower oil prices in USDs for Russia are the same thing for Japan as Toyota lowering prices in USDs for their cars in the US....
The foreign BANKS (not Central Banks) get in trouble when this happens (Mosler: "delfation is bad for banks....") and the banks have to either hedge (if the problem is relatively minor maybe like a 10% deflation... ie they may be able to handle a small 10% off sale price for Toyotas with a hedge and they sell Yen to another bank they can find ...... or, if the deflation is more severe, they have to get a swap from the CB like is happening in russia as oil has completely collapsed and no one else will deal with them other than the Russian CB...
How else can the russian CB "LOSE" USD reserves? How else? they only deal with russian banks... they have to be transfering reserves to their members.... Where else can the Russian USD reserves go???? the cb doesnt deal with anyone else other than its members... ??? so if the cb "loses" something, it HAS to have gone to its members... where else can it go????
Human nature takes over and the people at the Russian CB "want to get a good deal for the taxpayers...."
Down goes the rouble vs USD... the CB sets it there...
For this NOT to happen, when the bank comes in to the CB for a swap, say the exhange rate is at 50 ... well the Russian CB people would have to say, "Nah, thats ok, we dont need the 50, just give us 49 that should be enough..." ... not going to happen imo... they want a "better deal"...
Could be, Matt, but from what I understand the RCB is providing ample liquidity to the banks via gold purchases. The banks used to purchase the gold from the miners and then sell it on. Now the RCB is taking it all and supplying rubles to the banks.
This kind of research into consciousness has been going on at least since the Sixties, e.g., at Stanford Research Institute. William Tiller was one of the pioneers.
William A. Tiller is a professor emeritus of Materials Science and Engineering at Stanford University.[1] He is also the author of Science and Human Transformation, a book about concepts such as subtle energies beyond the four fundamental forces, which he believes act in concert with human consciousness.
Tom that might not help out with their USD problems though...
I could see that if the RCB was selling them their USDs at the Fed for the gold though... instead of what you posit here that they are trading rouble RBS for gold... I would think banks over there shouldnt have to get gold in order to obtain rouble RBS they should be able to use any other acceptable russian financial assets collateral ...
If you are seeing gold involved, the banks may be buying the gold for roubles and then sell the gold to the CB for USDs at the Fed...
Which they could avoid having their people go thru the Gimli Son of Gloin act if they would just accept their own RBS for the USDs instead of making their own people dig for gold...
The whole world is being fucked up by these morons at "the top end of town" who dont understand how the system is set up and supposed to work best and what all of their proper roles are within that system imo...
rsp,
For the RCB, gold = USD. The RBC has decided to hold gold reserves as a USD substitute and sell gold as needed for USD instead of buying USD with rubles. So the RCB is increasing its gold reserves as it decreases its USD reserves.
Russia still gets some USD for oil and gas sales but they are trying to replace the USD as a reserve currency and so are cutting back on the use of USD insofar as possible.
Of course, as Russian commercial banks and firms need USD they can get them from the RCB instead of having to go to the fx market.
Given what Russia is trying to accomplish this is not a bad geopolitical and geostrategic strategy. Moreover, other countries are beginning to realize that they are exposing themselves to US political control in being so hooked into the USD that sanctions would harm them, too, if brought to bear. This is starting to backfire as EM's seek to end run the USD in commerce among themselves.
The RCB should just abandon its monetarism and quit raising rates and it would be OK. There's enough liquidity in Russia to weather the storm and they can trade around the US, too, since they have an abundance of natural resources and desirable products, especially military hardware much of which is competitive with the US and costs less. The Russians are also selling their expertise in nuclear energy, building out nuclear power in Iran and India, for instance.
Moreover, Russian goods and assets are a huge bargain right now with the depressed fx rate. This is not going to go unnoticed for long. No one thinks that NATO actually wants a land war in Eurasia that it cannot win decisively, and Russia is far from collapsing. The big challenge Putin has is from his own "fifth column" of neoliberals, and they are now anathema to the public.
As Mike says, if they can make the moves that are open to them, they are in the clear and can call the shots. We'll see.
From Krugman today:
"My other thought is that Venezuela-with-nukes (Russia) keeps looking more vulnerable to crisis. Long-term interest rates at almost 13 percent, a plunging currency, and a lot of private-sector institutions with large foreign-currency debts. You might imagine that large foreign exchange reserves would allow the government to bail out those in trouble, but the markets evidently don’t think so."
Its not "the markets dont think so"... this is more typical academe of eceonomics metaphorical nonsense...
Earth to Krugman: "markets" cannot "think" Krugman...
rather, PEOPLE can "think"... AND the PEOPLE at the CB there are "thinking" that they want to "get a good deal" so they are seeking to get MORE roubles for their USD balances at the Fed than the last time...
Rouble goes DOWN vs USD when they do this... It is about PRICE... not quantity...
All they have to do is give their member banks their USD balances for LESS roubles than before... then rouble will go UP vs USD...
and get a f-ing appropriation from the russian govt to operate the CB when it eventually goes negative equity instead of this idiocy of relying on CB "profits" to operate the CB...
And leave the f-ing "precious" metals out of it entirely....
Knowingly or unknowingly, Putin's economic advisors are playing their role as an American fifth column within Russia.
Why would they want the ruble to go up against the USD when the ROW is trying devalue their currencies. The lower the ruble goes the bigger the gift to Russia. It actually helps them restructure and deepen their economy. The other gift is that sanctions keep Western investors out avoiding the neoliberal trap.
BTW, the Russian is not all that dependent on oil revenues anymore. No expert I am reading other than the wishful thinkers is saying that Russia is in danger of economic collapse.
The mistake that the RCB is making is jacking up the interest rate. They don't even have to be concerned about blowing out the budget with debt interest since Russia runs a fiscal surplus, which, of course, it should not unless it is at full employment.
Any inflation is due to imports and they should just let these prices rise and substitute, since they can produce the commodities that most everyone else needs, oil and gas.
It's not like any inflation is due to rising energy costs or money creation outrunning the capacity f the economy to expand to meet it. There just won't be the selection of imported goods at fairly reasonable prices that many have become used to. That's not the game-changer than the neocons think it is. Russians haven't become pampered yet.
Russia can actually counter inflation by lowering the price of energy for domestic consumption while it ramps up its own economy to produce what it had been relying on the ROW to export. But it had already been doing this. Now that is going to pick up speed and Russia can provide for it real terms with its own energy and natural resources. All the RCB has to do is provide the liquidity to fund it nominally. The real resources are at hand.
What long term interest rates is Krugman referring to?
Is it rates on dollar denominated Russian debt ? Or on rouble debt?
A pity he didn't clarify that point.
Tom the "neocons" dont even know what the heck is even going on with any of this.... ask Joe Neocon why the rouble is going down and he or she will probably reply 'they are printing too many roubles and dont have a hard currency! " or some shit. .. the weak currency lowers their real terms of trade with US/Europe. ..
Bob I think those Russian CB people are just succumbing to human nature and are acting in the self interest of the CB they work for ..... and like you say when they do this they are not acting in the better interest of their greater country...
Jose , Krugman probably thinks "money is money" and 'the market' not only has a mind and can "think" (LOL!) but also sets interest rates ....
Rsp
Matt, from what I read the RCB doesn't mind the ruble weakening nor does Putin and the political crowd. They realize that this is an economic advantage. It would be a problem if the West could use the opportunity to buy up Russian assets but due to the sanctions, it can't. Moreover, the sanctions act as a tariff that favors Russian domestic investment and production.
The RCB just want to manage the fall of the ruble so that it doesn't fall so quickly as to look like a collapse. Then the speculators will pile on. So the RCB steps in now and then to drive it up a bit to shake out the weak shorts.
Their switching to using their surplus to buy up Russian gold production is also a good move in that it keeps everything internal and allows Russia to avoid holding USD. It can easily get the USD it might need by selling the gold.
That just should not be trying to address inflation through raising the interest rate.
I hope they've learned something since operationally unnecessary the bond default in 1998. Seems they have by dropping the dollar peg this time. Now they have make sure that productivity is stable or increasing. The government has the tools if it realizes it.
Matt, the "market" can certainly influence the interest rates on dollar denominated debt issued by Russian companies including banks (and also rates on public debt denominated in dollars, that the RCB may have been foolish enough to issue).
But of course the interest rates on (rouble) public debt are under the sway of the RCB. Let´s then just hope Krugman´s comment wasn´t about that debt.
:)
Jose,
I dont think the RCB would have issued USD debt I would think that would have to be the Russian Treasury...
But follow me here please, What if the CB is doing a 'swap' with an implied interest rate for short term USD liquidity for the member bank's USD problems?
Wouldnt they do it like I described above? ie if todays exchange rate for USDs is 50 rouble, then if they do it as a swap they would require a 'discount' up front, so they would ask for 51.5 roubles for a USD today and would that not also be setting the IR as well as reset the exchange rate for USD debt in Russia?
Matt, you're right of course. It's the Treasury (I meant to write "Russia" instead of the RCB).
The problem is that the RCB has a limited if substantial amount of dollars. The best course thus seems to lie in non intervention. Let the rouble sink until the shorts start to feel the first losses - that moment will come sooner or later.
Swap rate is the fixed rate that receiver demands in exchange for the uncertainty of having to pay the short-term LIBOR (floating) rate over time. At any given time, the market’s forecast of what LIBOR will be in the future is reflected in the forward LIBOR curve. At the time of the swap agreement, the total value of the swap’s fixed rate flows will be equal to the value of expected floating rate payments implied by the forward LIBOR curve. As forward expectations for LIBOR change, so will the fixed rate that investors demand to enter into new swaps. Swaps are typically quoted in this fixed rate, or alternatively in the “swap spread,” which is the difference between the swap rate and the U.S. Treasury bond yield (or equivalent local government bond yield for non-U.S. swaps) for the same maturity.
In most emerging markets with underdeveloped government bond markets, the swap curve is more complete than the treasury yield curve, and is thus used as the benchmark curve.[1]
http://en.wikipedia.org/wiki/Swap_rate
The CB may be arranging it as a swap.... and so setting the "price" (interest rate) in roubles AND the "price" in USDs (exchange rate with USD)...
Yes, but swaps have limits and haven´t worked as expected in the case of Brazil´s CB large scale program:
"...if foreign exchange inflows to Brazil (commercial and financial) turn persistently negative in the near future, banks will refrain from arbitraging the swaps and the spot dollar as they have been doing since the BCB’s programme began. The consequences would be a combination of exchange rate depreciation and a rise in the cupom cambial, indicating a shortage of spot dollars. To avoid such an outcome, besides its sales of swaps, the BCB would have to sell or lend its international reserves to irrigate the spot market."
http://blogs.ft.com/beyond-brics/2014/08/25/guest-post-the-limits-of-brazils-fx-intervention-programme/
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